OpenSea BLURed Vision

In business, a “moat” refers to a sustainable competitive advantage that makes it difficult for competitors to enter a particular market and compete effectively. The term “moat” is often used to describe a company’s ability to maintain its market position and profitability over an extended period, despite competition from rivals.

A company’s moat can be derived from a variety of factors, such as brand recognition, economies of scale, regulatory barriers to entry, network effect, and intellectual property protections. Warren Buffett is known to popularize the idea of investing in businesses with strong moats, which is the pinnacle of value investing.

I don’t intend to discuss value investing in this essay or teach investing 101, because I’m not that much of a fan of value investing, and I’m also not a certified financial analyst. What I want to explore is how network effects can be broken and business moats destroyed.

Network Effects

A network effect is a phenomenon where the value or utility of a product or service increases as more people use it. In other words, the value of a network or platform grows as the number of users or participants increases. Social media platforms and messaging apps like Facebook and WhatsApp are a classical representation of a network effect. These platforms get more useful as more people join since it increases the number of people you can communicate with through the app. It’s essentially a flywheel that creates a virtuous cycle where the more users a platform has, the more valuable it becomes, which attracts even more users, leading to further growth.

Marketplaces like Amazon and eBay also operate on the network effect phenomenon, as these platforms become more useful to both buyers and sellers as more products and services are listed, as it increases the likelihood of finding what you need.

With the backdrop of what a moat is and how network effect is one if not the most important factor in a business moat. Let’s walk through how Facebook was able to disrupt the MySpace network. The Facebook and MySpace comparison is usually the poster child when people talk about network effects.

For the sake of those who aren’t familiar with the history or never got to use MySpace. Let’s jog the memories of those who might have forgotten and give a little history class to those who don’t know. As the saying goes “Those who aren’t familiar with history are doomed to repeat it.” As a quick aside, not all history is evil, some are worth repeating.

MySpace

Tom Anderson and Chris DeWolfe founded MySpace in 2003. It was one of the first social networking sites on the internet and quickly rose to prominence among young people, most especially musicians and artists.

Users could create profiles, add friends, and share music, photos, and videos. Those that wanted to express their creativity and individuality could customize their profile using HTML codes.

MySpace used to be a dominant force in the social networking world, to the point of even surpassing Yahoo (a popular search engine then). It was the most visited website in 2006, surpassing even google in terms of page views. This goes to show how huge Myspace was.

News Corp, owned by Rupert Murdoch acquired Myspace in 2005 for a whopping $580 million. I guesstimate that to be the worst investment that Murdoch ever made, as 6 years later, MySpace was sold for fractions of what it initially cost him. MySpace was sold to Specific Media for $35 million.

Assuming you were an avid user of MySpace and fell asleep in 2006 only to awaken today, or you just landed on Earth, and read the above, the first question on your mind would be “how the heck did that happen!”

Enter Facebook, which was founded a year after MySpace. At first, it was only available to college students but eventually expanded to a wider audience.

Several factors lead to Facebook’s dominance over MySpace. User experience was one of the biggest. Facebook had a cleaner, simpler, and more intuitive user interface compared to MySpace’s own, which was cluttered and difficult to navigate.

Facebook also had a more robust privacy control than MySpace, which gave users more control over who could see their personal information and post.

Another discerning factor was how both platforms were marketed. Facebook was focused on connecting family members and friends, which gave it a wider audience reach. While MySpace on the other hand was marketed to a niche audience, like musicians and brands.

Integration with other websites was something that Facebook had but wasn’t available on MySpace. This feature made it simple for users to connect their accounts to other websites, making it easier to share content across platforms. The famous sign-in with Facebook.

Both platforms launched a mobile app in 2008, although Facebook was the first to. This would have probably given Facebook a First Mover Advantage.

At its peak, MySpace was worth $12 billion in 2007 and had 76 million users in 2008. As of 2021, MySpace is worth $50 million and still boasts a few million users, which is a shadow of itself. The ship took a turn that year, as Facebook had 140 million users as of December 2008. Facebook was a privately held company at that time, so its valuation wasn’t publicly available. However, in 2007, Microsoft invested $240 million for a 1.6% stake in the company, which implied a valuation of $15 billion at the time.

Using the number of active users and the company’s worth, it’s obvious that Facebook surpassed MySpace between 2007–2008.

The reason I went through the history of MySpace is that it’s the last time we saw a network effect break in real time. In short, people think that a network can’t be broken, probably because they haven’t seen one or are quick to forget.

Network effects are stronger in technology and social media, and now crypto. In short, businesses on the internet that aren’t limited by geographic locations and where the cost of switching for the user is almont zero, tend to create the most network effect.

What we just went through is a classic example of a network effect that broke down in the past. Times move fast in technology. 14 years may seem like a decades or crypto people weren’t around then. To make up for that shortcomings, we are witnessing another network effect breakdown in real time. This time in crypto and not in technology. It’s happening in the NFT marketplaces.

Network effects in crypto are a function of first mover advantage (FMA). The protocols/projects with the most network effect in crypto are usually the first to offer the product in their line of business or do something different. Bitcoin was the first cryptocurrency. Ethereum was the first to allow for the programmability of a blockchain and introduced what is now known as smart contracts. Uniswap was the first Decentralized Exchange (DEX) for token trading. Opensea was the first marketplace for NFTs. I could go on and on, giving examples of how being the first to do something in crypto results in strong network effects.

NFTs

Photo by Andrey Metelev on Unsplash

NFTs, or Non-Fungible Tokens, are unique digital assets that are stored on a blockchain, a decentralized public ledger. NFTs are a type of cryptocurrency that represents ownership of a specific item, such as digital art, music, videos, or any other digital asset.

Unlike other cryptocurrencies, such as Bitcoin or Ethereum, which are interchangeable and have the same value, NFTs are unique and have different values based on their rarity, popularity, and demand. Each NFT has a unique identifier that makes it distinguishable from all other tokens, and it is impossible to replicate or exchange it for another token.

The majority of NFTs in themselves are pretty much useless, no pun intended. Jpegs, altcoins with pictures — as Cobie would call them, account for ~60% of NFTs. Jpegs derive most of their values from aesthetics, the likes of Crypto Punks, BAYC, and MAYC to name a few. Although there have been recent developments, trying to assign additional value to NFTs. For instance, it can get you a pass to an exclusive invite-only discord hangout, go backstage with your favorite artist, and the biggest of them all, play golf with a former president of the United States, you guessed it right, Donald Trump. It can also be used in the metaverse, as we see with Yuga Labs’ Otherside NFTs.

In all honesty, people barely think of any of this before hitting the buy button on OpenSea. Most of them are purchased as financial instruments or as a flex — use them as your display photo on Twitter. Perhaps we can save the whole NFTs’ utility argument for when we try to convince our grandma to get one. Just to be clear, when I talk about NFTs I’m referring to jpegs, because they account for ~60% of NFTs in existence, and are the ones that seem to have found product market fit. While there are other categories, like gaming, ticketing etcetera that would argue that their NFTs have inherent values. Those aren’t big enough yet, and we don’t know what their staying power is. Jpegs is the frontier of NFTs, so we’ll stick with that in this essay.

A marketplace would sooner or not ensure, as long there’s enough buying and selling.

NFT marketplaces

NFT marketplaces are online platforms where non-fungible tokens (NFTs) can be bought, sold, and traded. NFT marketplaces provide a venue for creators to sell their NFTs directly to buyers, without the need for a middleman, barring the marketplace operator.

Buyers can browse through a wide range of NFTs on these platforms, and purchase the ones that they are interested in, using the cryptocurrency of their choice or good ol’ fiat.

NFT marketplaces typically charge a fee for each transaction, either as a percentage of the sale price or as a flat fee. These fees can vary depending on the platform and the size of the transaction.

Some popular NFT marketplaces include OpenSea, Nifty Gateway, SuperRare, Foundation, Blur, and Rarible. These marketplaces offer a variety of NFTs ranging from digital art, music, videos, and other digital collectibles.

OpenSea is the most popular and biggest marketplace for trading NFTs but seems to be losing its shine to newcomer Blur.

NFTs aren’t fungible as the name suggests, giving way to liquidity issues. Liquidity issues in trading refer to a situation where there is a lack of buyers or sellers for a particular financial asset or security, which can make it difficult to buy or sell that asset quickly and at a desirable price.

When an asset is considered liquid, it means that it can be bought or sold quickly and easily without significantly affecting its price. In contrast, when an asset is illiquid, there may be few buyers or sellers, and a trade can take longer to execute, and it may be necessary to accept a less favorable price.

This is prevalent in the NFT space because they are non-fungible. For instance, I can sell Eth in exchange for fiat on Coinbase or USDC on Uniswap, with little to no slippage and front running. I don’t ever have to bother if someone else is willing to take the other side of the trade. Because the Eth I own is fungible and there’s always going to be a buyer at a good enough price.

With NFTs it’s different, it’s difficult to get a buyer regardless of price. Punk #6545 might be for sale, but what I need based on aesthetics is #5002. I’m just using CryptoPunks are an illustration. CryptoPunks is one of the blue chips and will always see a buyer. Because beauty lies in the eyes of the beholder when it comes to valuing art and most if not all NFTs have zero intrinsic value, this makes the trading of NFTs more illiquid.

How do traders go around this? They flock to a particular venue. A marketplace they know they will see a buyer if they put their NFT up for sale, leading to network effects. There are over 500 exchanges for trading fungible tokens (like Bitcoin and Ethereum), with a handful of them, say 20, being prominent. This is going to be way lesser when it comes to NFT marketplaces. Who’s going to list an NFT on the 420th NFT marketplace with zero users and trading volume? Where you have to wait weeks if not months to get a bid.

The blockchain the NFT and the marketplace are on, also plays a role in how liquid or illiquid it is when it comes to trading. Ethereum is the home of NFTs, its heads and shoulders above its closest competitor — Solana.

NFT marketplaces in the future are going to consolidate, either forms a duopoly or oligopoly. With this backdrop of liquidity issues NFTs face, which is inherent in the design, and is a feature and not a bug. I will now attempt to access who might come out victorious in the NFT marketplace wars. Who is going to be the leaders assuming we have a duopoly or oligopoly.

In the next part of this essay, I will examine the three prongs of liquidity in marketplaces. This isn’t peculiar to NFT marketplaces but transcends pretty much every place buying and selling occurs. Trading Volume, Users, and Trade count. The logic here is that more users trade more often which leads to high trading volume. This isn’t always linear, there could be instances where few trades could result in high volume or lots of trades resulting in low volume.

A quick overview of Blur

Blur is the new kid in town when you talk about NFT marketplaces. It’s a platform that operates both as a marketplace and an aggregator. It allows users to simultaneously list their NFTs for sale on multiple platforms. It supports paying royalties, doesn’t charge trading fees, and has a more intuitive user interface.

What differentiates Blur from other marketplaces is the fact that it caters more to power users — professional NFT traders, unlike others that are more retail-oriented, OpenSea for example. Blur offers batch shelf and floor-sweeping transactions in addition to order book NFT transactions, making it possible for NFT traders to make batch operations more convenient.

Trading Volume

This is by far considered the most important metric when it comes to marketplaces. Trading volume refers to the total number of shares or contracts traded for a particular security or financial instrument on a particular exchange during a specific period, usually a day, week, or month. It’s a measure of how much buying and selling activity is taking place in a particular market or exchange. It is an important indicator of market liquidity, which is the ability of investors to buy or sell NFTs without significantly impacting their price.

Generally speaking, high trading volumes can indicate increased investor interest and activity in a particular marketplace, which can lead to higher liquidity, tighter bid-ask spreads, and more efficient price discovery. Conversely, low trading volumes may suggest decreased interest and activity, which can lead to wider bid-ask spreads, lower liquidity, and greater price volatility.

About 2 years ago, OpenSea accounted for ~90% of NFT marketplace trading volume. New NFT marketplaces like X2Y2, and Looksrare, came into the scene, eating into OpenSeas market share in terms of trading volume, via vampire attacks. OpenSea dominance was further decimated by the launch of Blur, six months ago. Blur also eat market share from not to prominent marketplaces.

Currently, Blur is leading the packs when it comes to trading volume on NFT marketplaces, even surpassing the almighty OpenSea. Blur now accounts for 78.6% of weekly volume, versus OpenSea’s 23.2%.

The turnaround in trading volume, accelerated this year, with Blur netting a weekly volume of over $500m, the week it launched its token. The Blur token was airdropped to users of the platform on February 14th. That’s why we saw an uptick in trading volume on Blur. It’s could be users farming the airdrop, because before then, OpenSea and Blur went neck-on-neck in trading volume. Also, trading volume on Blur peaked the week of the airdrop and has since begun to recede, while OpenSea has maintained a weekly average trading volume of over $100m for the past 6 months.

It’s quite too early to tell if Blur can maintain its dominance when it comes to trading volume.

Adjusting for Wash Trading

Despite OpenSea trading volume taking a hit last year, due to crypto and NFT prices down big time. Wash Trading of NFT on OpeanSea is almost non-existent. Only 2.36% of OpenSea’s trading volume is a result of wash trading.

17.48% of Blur’s weekly trading volume is a result of wash trading. There’s 7.4x more wash trading going on in blur than on OpenSea.

Users

Users refer to individuals or entities who participate in buying, selling, or creating NFTs on these platforms.

Users may also have different roles on NFT marketplaces. For example, some users may create and mint their NFTs, while others may browse and bid on existing NFTs listed for sale. Some users may also participate in auctions or engage in peer-to-peer transactions, or they may be investors looking to profit from the sale or purchase of NFTs.

Users are a crucial component of NFT marketplaces, as they are the ones who generate demand and supply for NFTs and contribute to the growth and development of the ecosystem. The success of NFT marketplaces largely depends on the number and activity of users on their platforms.

Despite OpenSea losing grounds to Blur in trading volume, it’s still where most users are. OpenSea has 64.5% of the users versus Blur’s 35.5%.

This implies that OpenSea has almost 2x the number of Blur users, despite doing a lower trading volume.

More users trading, should by default result in more trading volume, but that isn’t always the case as we are seeing with the discrepancies between Blur’s users and trading volume. There a different reasons why such can happen.

1. OpenSea is the longest-running NFT marketplace. Was the first and once the biggest (could still be the biggest, it all depends on where you look). As a result of that, attracted more users over time strengthening its network effect. Blur is just 6 months old, while OpenSea is 6 years old. It’s impressive that Blur has accumulated that many users in a short amount of time.
2. Most of Blur’s volume could be a result of wash trading. As we just saw above, that isn’t the case. Even if the percentage of wash trading was exempted from Blur’s trading volume, it’d still surpass OpenSea’s.
3. Blur’s volume is coming from a few power users — professional NFT traders, who trade in large volumes. The downside to this is that Blur can see trading volume tank if these few power NFT users leave.
4. Blur’s Design. Blur offers batch shelf and floor-sweeping transactions. This enables faster and easier transactions, resulting in higher volume.

In closing this section, Blur will have to grow its user base to remain competitive with the likes of OpenSea.

Trade Count

This refers to the total number of trades or transactions that have taken place on the platform, on a specific time interval, this could be on a daily, weekly, or monthly basis. This can include the total number of NFTs bought and sold, as well as any trades or exchanges that have taken place.

For example, if an NFT marketplace platform has a trade count of 100,000, it means that 100,000 trades or transactions have occurred on that platform in the given time interval.

Trade count can be an important metric for evaluating the popularity and overall activity level of an NFT marketplace. A high trade count may indicate that the platform is attracting a lot of buyers and sellers, which can make it a more attractive place to buy and sell NFTs, which increases its liquidity.

Off the bat, Blur is the leader when it comes to trade count. Blur accounts for 52.9% of the total trade count in the NFT space.

Looking further shows that Blur’s trade count shot up in February, leading to the launch of its native token — $Blur. On the other hand, OpenSea has had a steady trade count, in the last 6 months, although it has declined a bit in the past few weeks. At this point, it’s had to tell if this is just token incentives playing out in favor of Blur, or if there’s something organic here. If the move has steam to continue or if it fades into oblivion as time passes.

Summary and Conclusion

It’s important to give credit where it’s due. I find it astonishing and impressive how quickly Blur’s ecosystem has evolved since its launch 6 months ago. Despite being a newcomer, it has been able to establish itself as one of the leading NFT marketplaces and is in the process of cementing itself as the winner of the NFT marketplaces wars, although that is yet to be determined.

Blur isn’t the first to take a bite of OpenSea’s apple. Previous attempts by Looksrare, X2Y2, and Rarible to name a few have proved futile. Either few persons use them or when they do, it’s more of wash trading activity going on there, than anything of meaningful substance. OpenSea maintained dominance regardless of newer marketplaces trying to steal market share from it until Blur came around. The major difference between Blur and previous marketplaces which attempted to steal market share from OpenSea was their “target audience”. The X2Y2’s and Looksrare’s of the world are retail oriented, making it difficult for them to put up a fight against OpenSea as worthy competitors since OpenSea is also retail-aligned.

Blur targeted a different audience, a part of the market that hasn’t been serviced until they showed up — the professional traders. Analogous to how MySpace targeted more musicians and artists which is a niche audience, compared to Facebook which targeted family and friends with a much broader reach.

Out of the numerous things that make Blur special, one of the things they do have that OpenSea doesn’t yet, is a token. Blur launched its native token $BLUR alongside an airdrop. With dates of seasons 2 and 3 of the airdrop yet to be announced, I can say with over 50% certainty that it’s coming sometime in the future. Saw similar dynamics with marketplaces like Rarible, X2Y2, and Looksrare when they launched and had their token incentives ongoing. They surpassed OpenSea for a brief period in all three stated categories above. Only to dwindle, and close to the point of fading into oblivion as the token incentives ended. Every metric (apart from wash trading) for the named exchanges has been on a downtrend since their token incentives came to an end, while that of OpenSea has stabilized or grown during the same period.

Blur’s token incentives, could be distorting the data in a way, as most of their users could just be “airdrop farmers”. One thing Blur is doing differently compared to its predecessors on token incentives is how long before the music stops. Blur’s predecessors did a one-off thing. Users left as soon as the incentives ended. Blur intends to stretch theirs out, over a couple of seasons. It’s the idea of taking the wine in sips so it can last longer rather than in gulps. It’s possible that Blur can retain its users by the time the token incentives end, but it’s still possible that a newcomer comes around and most of Blur’s users move elsewhere.

Another area to consider is the state of the market. Blur’s predecessors launched at the top of the market. With prices taking a hit following the months of launch, users left. Not peculiar to the marketplaces, but the general condition of the market. Blur launched at the bottom, and the price of Eth (which most NFTs are denominated in), has been up only since then. That could be playing a factor in Blur’s success so far and would be a determinant going forward. If we are in the first innings of a bull market, then Blur’s growth process will be nothing like its predecessors. This means that Blur will experience more success at the bite of OpenSea’s apple than those who have tried it before. Blur could go on to be the leader of the NFT marketplace wars if we go down that part. Of course, these are all speculations at this point, so it’s difficult to tell how things pan out. Blur’s token incentives would have to first end, only then we can now tell what’s organic from what’s not.

I will conduct this analysis later in the future when the token incentives must have ended and Blur’s marketplace matured. Will re-examine this analysis say in the next six months to a year to see how things have played out and to check if Blur is still a winner of the NFT marketplaces war (as it is today). I think Blur would still be a force to reckon with in the foreseeable future.